When hearing President Obama yesterday evening in his State of the Union address propose reorganizing the federal government in a more sensible fashion, I wondered what the effect might be on my former employer, the U.S. Treasury Department. The last major reorganization of the government occurred when the Department of Homeland Security was created. In terms of turf, the Treasury was a big loser then. It lost Customs and the Secret Service to Homeland Security and much of the Bureau of Alcohol, Tobacco, and Firearms to the Justice Department.
The Treasury did retain the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCen). OFAC in particular could plausibly be placed in other agencies, such as the State Department, Homeland Security, the Justice Department, or even the Commerce Department. The argument for keeping it in Treasury is that a large part of what it does involves banks, but certainly many of its activities are much broader in scope than banking transactions. Moreover, OFAC carries out both an enforcement and foreign policy function. It is not a neat fit anywhere. In Treasury, there is tension between OFAC, whose activities by necessity make financial transactions more difficult to carry out, and the Treasury's institutional predisposition to the free flow of capital and belief in the efficacy of financial markets. One hopes this tension leads to a good balance between competing objectives.
The Treasury also retains authority on wine labeling, as this function of ATF did not go to Justice. That could plausibly be housed elsewhere. For example, there was a controversy during the Clinton Administration over whether the wine industry could refer on wine labels to the potential health benefits of drinking wine in moderation. Senator Strom Thurmond strongly objected to this and prevailed. I suspect that most senior Departmental officials, including most Secretaries, would rather not have to get involved in this type of issue.
The Treasury has over the years lost many functions, including drug enforcement, formulating budget policy, and managing the Coast Guard. In recent years, it has gained regulatory authority by getting the Office of Thrift Supervision as one of the pieces of the Federal Home Loan Bank Board that was abolished and split up due to the S&L crisis. The OTS is to be merged with the OCC, but both bureaus have a great deal of independence from the Secretary. Dodd-Frank gives the Treasury more authority in the financial regulatory sphere, but the organizational structure of financial regulation continues to be overly complex and fragmented. The Administration will probably not want to tackle this right now, having recently made its policy and political judgments in the process leading to the enactment of the Dodd-Frank legislation.
One of the criticisms that could be levied against former Treasury Secretary Paul O'Neill is that he did not fight the loss of Treasury functions when the Department of Homeland Security was created or insist on something in return. He undoubtedly thought that the functions Treasury was losing were not central to Treasury's primary responsibilities. On the other hand, others would argue that the more responsibilities an agency has, the more respect private sector actors will accord that agency. Moreover, some think that losing the Secret Service was a big loss; in addition to protecting the President, the Secret Service has the responsibility to battle counterfeiting, which arguably is related to Treasury's core functions.
In any case, it is not clear what President Obama intends by proposing government reorganization nor whether there are any plans to add responsibilities or to subtract them from Treasury.
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